Last week, I had the pleasure of talking to ‘Jack’ who has the inside track as to what is going to be the approach of HMRC (and probably every other Government signed up to CRS) to the receipt of information about trusts which is about to start going into their hands. It is Armageddon for the offshore trust industry.

Pablo is a prime target. Eight years ago he sold his beef production business in Argentina, for a nine figure sum and transferred it into a trust in the Cayman Islands. He appointed a professional trustee, ABC Limited and his brother Horacio as a Protector.

During the set up procedure which he worked on with lawyers in Argentina and fiduciaries in Switzerland ‘Cresta’, the topic of most discussion was what powers should be reserved in the Trust Deed to his brother, Horacio.

A letter was written to Pablo by Cresta copied into Horacio and the trustees, ABC Limited which said

‘There are a number of reasons why you may wish to appoint a Protector

· It is comforting to you to know that Horacio is specifically appointed to ensure that the trustee is administering the trust in an appropriate manner,

· Horacio has detailed personal knowledge of you and your family as you are very close and is a resident of Argentina, so he is fully aware of the politics and culture of the country, which may not be fully understood by your professional trustee in Cayman;

· Horacio will be the main channel of communication between the trustee and beneficiaries and between the trustee and beneficiaries, and between the trustee and settlor, and can mediate in potential disputes

· Horacio can also keep the trustees in check to ensure that they are mindful of the Pablo’s wishes and act accordingly’

Pablo responded, in writing to say

‘ABC Limited was recommended to me by my lawyer in Argentina. I have met the CEO, Juan, on a business trip to Buenos Aires. He is a good man, but I am not ready to entrust my life’s work to him to do with as he pleases, without being able to get my money back if I need to. I will not give anyone carte blanche over my money!’

After much correspondence about the role and powers of the Protector, Pablo writes

‘I can see the benefits of a trust, for tax mitigation, succession, asset protection and privacy, but I am not prepared to have these benefits at the cost of losing control over my money. I will only consider setting up a trust if either I or Horacio are given power to instruct the trustees to invest and distribute the funds’

Cresta replied the ‘benefits of the trust are only available if the trustee has full discretionary power over your assets’.

There then follows three months’ silence, after which Cresta reminds Pablo that he has not come to a decision. During this time Argentina take a turn for the worse for wealthy families living in Argentina and so the correspondence recommences.

Pablo finally agrees to set up a trust; under which Horacio is given a power of veto over the decisions of ABC Limited and a positive power to remove the trustee and appoint a new one.

As soon as the trust is set up, Pablo stays in regular touch with his trustees telling them what he wants done. To begin with, he copies in Horacio, but after a few years stops. ABC Limited does not always do what Pablo requests, however, on the whole, Pablo makes sensible decisions so they conform to most of it; but from the correspondence Horacio is clearly not the driving force Pablo is.

In the not too distant future, ABC Limited will need to disclose to the Cayman tax authorities all persons of ‘significant influence’ over the trust; Pablo, as the settlor, Horacio the Protector, and all the names of his family – his wife and three children. Although in practice and in law, no-one other than the ABC Limited has ‘significant influence’, the tax authorities want to know the identity of everyone involved.

The Cayman tax authorities will then, again – eventually, report all these details to the tax authorities in Argentina.

Armed with this extensive and detailed personal information, Argentina will not immediately approach Pablo or Horacio, they will first take away any defence which Pablo may have by going straight to ABC Limited. ‘We have reason to believe [because of the existence of a Protector – Horacio] that Pablo’s trust is a sham, and would like to investigate the set up and ongoing correspondence to see whether this is an avenue to pursue’.

ABC Limited will then be obliged to disclose its correspondence with Cresta and Pablo which will include the above. Armed with this information it will insist that Pablo’s trust is a sham and put in a tax demand accordingly. Pablo will then need to dispute the tax demand, but is now at a substantial disadvantage given that the Argentine tax authorities have all the sensitive information it needs to make such demands.

If Pablo capitulates, he will have to pay the tax as if the trust had never existed, but he can demand the return of all the fees paid by the trust fund to ABC Limited. Given that Pablo’s trust is its most significant ABC Limited will, as a result, be put out of business.

If you, as a settlor or a trustee want to avoid this, there are solutions, but you must act now to make sure our trust is not on top of your local tax authority’s pile.